As the fiduciary responsibilities of retirement plan sponsors in managing plan assets are subject to more and more regulatory scrutiny, investment committees are playing an increasingly important role in the investment decision-making process. Although the 1974 Employee Retirement Income Guarantee Act (ERISA) does not require it, the establishment of an investment committee is considered a good risk management strategy for plan sponsors who must bear most of the fiduciary responsibilities.By establishing an investment committee, plan sponsors can better pay attention to important issues that affect plan participants.
Establish an investment committee
The plan sponsor establishes an investment committee by drafting a charter detailing how to select committee members. The charter should state the purpose of the committee, which is to establish a formal procedure for managing the investment strategy of the plan. It also establishes the roles and responsibilities of members and the requirements for maintaining membership. The bylaws can specify which committee members are voting members who bear fiduciary responsibilities, and which are non-voting members who are not regarded as trustees.
Roles and responsibilities of committee members
Acquire the necessary knowledge: Committee members need to be educated in ERISA regulations and their fiduciary responsibilities. Members should have a firm grasp of the procedures for managing plan assets outlined in the plan documents, including the plan’s investment strategy. Members do not necessarily need an investment background, but they should be committed to learning what they need to know in order to make an informed decision. Committee members are responsible for keeping abreast of changes in ERISA regulations and legal rulings that affect program management.
Develop an investment policy statement: Create an investment policy statement (IPS) to include investment philosophy and investment strategies. The due diligence process for selecting and monitoring investment options should be clearly articulated. The IPS should include benchmarks to measure the performance of the plan. It should also include the process of selecting and evaluating investment managers, as well as changing their evaluation criteria and procedures. IPS should be reviewed annually to resolve any inconsistencies in program management.
Evaluate investment performance: Compare the performance of the plan with the benchmarks in the IPS. Look for changes in the investment management team, investment style, fees or expenses, and assets under management (AUM) to determine whether all of these are still consistent with the planned investment goals and parameters.
Financial review: The financial operations of the plan should be reviewed at least once a year and a report should be prepared for the company’s board of directors.
Regular meetings: Most of these responsibilities and functions are performed at investment committee meetings, which should be held two to four times a year. All relevant data, including the plan consultant’s report, should be provided to the committee members along with the agenda before the meeting.
Record everything: One of the main duties of the investment committee is to prove that prudent processes are in place and follow decisions. This is done by recording the meeting activities and any decisions made in detail. The committee should include fiduciary audit documents, including all investment-related documents.
Accept responsibilities: All these responsibilities and responsibilities should be recognized and accepted by each committee member. Committee members must be aware that ignorance or poor communication cannot exempt them from any fiduciary responsibilities, and ERISA rules and regulations are meant to protect plan participants, not committee members or plan sponsors. The ultimate responsibility of the plan sponsor and the investment committee is to protect the interests of plan participants. This can be achieved by creating the best plan possible and managing it with the highest trust standards.